Edgar Filing: COMMERCE BANCSHARES INC /MO/

CBSH 9.30.2013 10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

_________________________________________________________

For the quarterly period ended September 30, 2013



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

____________________________________________________________

For the transition period from to

Commission File No. 0-2989



	COMMERCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)



Missouri		43-0889454
(State of Incorporation)		(IRS Employer Identification No.)

1000 Walnut, Kansas City, MO		64106
(Address of principal executive offices)		(Zip Code)

(816) 234-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of November 1, 2013, the registrant had outstanding 91,294,404 shares of its $5 par value common stock, registrant’s only class of common stock.

Commerce Bancshares, Inc. and Subsidiaries

Form 10-Q



			Page
INDEX
Part I	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	3
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	4
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	5
		Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2013, and 2012 (unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)	7
		Notes to Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61
	Item 4.	Controls and Procedures	61

Part II	Other Information
	Item 1.	Legal Proceedings	62
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 6.	Exhibits	62
Signatures			63
Index to Exhibits			64

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PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS



	September 30, 2013			December 31, 2012
	(Unaudited)
	(In thousands)
ASSETS
Loans	$	10,823,654		$	9,831,384
Allowance for loan losses	(163,532		)	(172,532		)
Net loans	10,660,122			9,658,852
Loans held for sale	—			8,827
Investment securities:
Available for sale ($704,650,000 and $736,183,000 pledged in 2013 and 2012,
respectively, to secure swap and repurchase agreements)	8,577,282			9,522,248
Trading	18,295			28,837
Non-marketable	114,520			118,650
Total investment securities	8,710,097			9,669,735
Short-term federal funds sold and securities purchased under agreements to resell	87,167			27,595
Long-term securities purchased under agreements to resell	1,150,000			1,200,000
Interest earning deposits with banks	267,548			179,164
Cash and due from banks	594,309			573,066
Land, buildings and equipment, net	353,473			357,612
Goodwill	138,676			125,585
Other intangible assets, net	9,050			5,300
Other assets	481,855			353,853
Total assets	$	22,452,297		$	22,159,589
LIABILITIES AND EQUITY
Deposits:
Non-interest bearing	$	6,185,098		$	6,299,903
Savings, interest checking and money market	9,680,816			9,817,943
Time open and C.D.'s of less than $100,000	1,013,598			1,074,618
Time open and C.D.'s of $100,000 and over	1,338,252			1,156,189
Total deposits	18,217,764			18,348,653
Federal funds purchased and securities sold under agreements to repurchase	1,760,393			1,083,550
Other borrowings	105,928			103,710
Other liabilities	186,726			452,102
Total liabilities	20,270,811			19,988,015
Commerce Bancshares, Inc. stockholders’ equity:
Preferred stock, $1 par value
Authorized and unissued 2,000,000 shares	—			—
Common stock, $5 par value
Authorized 100,000,000 shares; issued 91,929,481 shares in 2013 and 91,729,235 shares in 2012	459,647			458,646
Capital surplus	1,104,669			1,102,507
Retained earnings	610,720			477,210
Treasury stock of 548,585 shares in 2013 and 196,922 shares in 2012, at cost	(23,528		)	(7,580		)
Accumulated other comprehensive income	26,025			136,344
Total Commerce Bancshares, Inc. stockholders' equity	2,177,533			2,167,127
Non-controlling interest	3,953			4,447
Total equity	2,181,486			2,171,574
Total liabilities and equity	$	22,452,297		$	22,159,589

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME



	For the Three Months Ended September 30						For the Nine Months Ended September 30
(In thousands, except per share data)	2013			2012			2013			2012
	(Unaudited)
INTEREST INCOME
Interest and fees on loans	$	110,587		$	111,619		$	326,391		$	335,627
Interest and fees on loans held for sale	—			85			176			278
Interest on investment securities	46,356			46,513			144,548			157,832
Interest on short-term federal funds sold and securities purchased under
agreements to resell	35			24			72			70
Interest on long-term securities purchased under agreements to resell	5,095			4,913			16,734			13,770
Interest on deposits with banks	71			40			223			207
Total interest income	162,144			163,194			488,144			507,784
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	3,502			4,623			10,801			14,338
Time open and C.D.'s of less than $100,000	1,380			1,945			4,785			6,055
Time open and C.D.'s of $100,000 and over	1,535			1,743			4,901			5,482
Interest on federal funds purchased and securities sold under
agreements to repurchase	166			221			654			623
Interest on other borrowings	855			851			2,496			2,633
Total interest expense	7,438			9,383			23,637			29,131
Net interest income	154,706			153,811			464,507			478,653
Provision for loan losses	4,146			5,581			14,810			18,961
Net interest income after provision for loan losses	150,560			148,230			449,697			459,692
NON-INTEREST INCOME
Bank card transaction fees	43,891			39,488			123,141			112,655
Trust fees	25,318			23,681			76,221			70,328
Deposit account charges and other fees	20,197			19,873			58,511			59,184
Capital market fees	3,242			5,110			10,938			16,991
Consumer brokerage services	2,871			2,441			8,410			7,543
Loan fees and sales	1,553			1,358			4,340			4,625
Other	9,239			8,971			27,303			24,995
Total non-interest income	106,311			100,922			308,864			296,321
INVESTMENT SECURITIES GAINS (LOSSES), NET
Impairment (losses) reversals on debt securities	(588		)	5,989			508			11,579
Noncredit-related losses (reversals) on securities not expected to be sold	258			(6,546		)	(1,768		)	(12,806		)
Net impairment losses	(330		)	(557		)	(1,260		)	(1,227		)
Realized gains (losses) on sales and fair value adjustments	980			3,737			(1,823		)	9,783
Investment securities gains (losses), net	650			3,180			(3,083		)	8,556
NON-INTEREST EXPENSE
Salaries and employee benefits	91,405			89,292			271,855			266,346
Net occupancy	11,332			11,588			33,801			33,953
Equipment	4,465			4,976			13,828			15,164
Supplies and communication	5,449			5,400			16,835			16,680
Data processing and software	19,987			19,279			58,522			55,030
Marketing	3,848			4,100			11,255			12,391
Deposit insurance	2,796			2,608			8,353			7,746
Other	17,030			16,148			53,866			52,882
Total non-interest expense	156,312			153,391			468,315			460,192
Income before income taxes	101,209			98,941			287,163			304,377
Less income taxes	32,764			32,155			91,871			99,541
Net income	68,445			66,786			195,292			204,836
Less non-controlling interest expense	221			780			246			2,298
Net income attributable to Commerce Bancshares, Inc.	$	68,224		$	66,006		$	195,046		$	202,538
Net income per common share — basic	$	.75		$	.71		$	2.14		$	2.18
Net income per common share — diluted	$	.75		$	.72		$	2.14		$	2.18

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended September 30					For the Nine Months Ended September 30
(In thousands)	2013			2012		2013			2012
	(Unaudited)
Net income	$	68,445		$	66,786	$	195,292		$	204,836
Other comprehensive income (loss):
Net unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recorded in earnings	(130		)	3,695		887			7,592
Net unrealized gains (losses) on other securities	3,815			25,160		(112,632		)	46,552
Pension loss amortization	476			453		1,426			1,358
Other comprehensive income (loss)	4,161			29,308		(110,319		)	55,502
Comprehensive income	72,606			96,094		84,973			260,338
Less non-controlling interest expense	221			780		246			2,298
Comprehensive income attributable to Commerce Bancshares, Inc.	$	72,385		$	95,314	$	84,727		$	258,040

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



	Commerce Bancshares, Inc. Shareholders
(In thousands, except per share data)	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Non-Controlling Interest			Total
	(Unaudited)
Balance January 1, 2013	$	458,646	$	1,102,507		$	477,210		$	(7,580	)	$	136,344		$	4,447		$	2,171,574
Net income						195,046									246			195,292
Other comprehensive loss												(110,319		)				(110,319		)
Distributions to non-controlling interest															(740		)	(740		)
Acquisition of Summit Bancshares Inc.	1,001		11,125						31,071									43,197
Purchase of treasury stock									(69,195		)							(69,195		)
Issuance of stock under purchase and equity compensation plans			(3,957		)				12,111									8,154
Net tax benefit related to equity compensation plans			454															454
Stock-based compensation			4,605															4,605
Issuance of nonvested stock awards			(10,065		)				10,065									—
Cash dividends ($.675 per share)						(61,536		)										(61,536		)
Balance September 30, 2013	$	459,647	$	1,104,669		$	610,720		$	(23,528	)	$	26,025		$	3,953		$	2,181,486
Balance January 1, 2012	$	446,387	$	1,042,065		$	575,419		$	(8,362	)	$	110,538		$	4,314		$	2,170,361
Net income						202,538									2,298			204,836
Other comprehensive income												55,502						55,502
Distributions to non-controlling interest															(1,976		)	(1,976		)
Purchase of treasury stock									(75,536		)							(75,536		)
Issuance of stock under purchase and equity compensation plans			(4,987		)				14,753									9,766
Net tax benefit related to equity compensation plans			1,233															1,233
Stock-based compensation			3,705															3,705
Issuance of nonvested stock awards			(8,501		)				8,501									—
Cash dividends ($.657 per share)						(60,819		)										(60,819		)
Balance September 30, 2012	$	446,387	$	1,033,515		$	717,138		$	(60,644	)	$	166,040		$	4,636		$	2,307,072

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Nine Months Ended September 30
(In thousands)	2013			2012
	(Unaudited)
OPERATING ACTIVITIES:
Net income	$	195,292		$	204,836
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	14,810			18,961
Provision for depreciation and amortization	31,152			32,565
Amortization of investment security premiums, net	22,840			29,989
Investment securities (gains) losses, net(A)	3,083			(8,556		)
Net gains on sales of loans held for sale	—			(376		)
Proceeds from sales of loans held for sale	—			22,649
Net decrease in trading securities	15,977			5,454
Stock-based compensation	4,605			3,705
Decrease in interest receivable	2,694			4,728
Decrease in interest payable	(1,319		)	(1,067		)
Increase (decrease) in income taxes payable	7,183			(5,571		)
Net tax benefit related to equity compensation plans	(454		)	(1,233		)
Other changes, net	(7,086		)	(10,718		)
Net cash provided by operating activities	288,777			295,366
INVESTING ACTIVITIES:
Cash received in acquisition	47,643			—
Proceeds from sales of investment securities(A)	6,624			14,931
Proceeds from maturities/pay downs of investment securities(A)	2,047,277			2,341,083
Purchases of investment securities(A)	(1,522,765		)	(2,036,260		)
Net increase in loans	(796,215		)	(489,628		)
Long-term securities purchased under agreements to resell	(125,000		)	(125,000		)
Repayments of long-term securities purchased under agreements to resell	175,000			125,000
Purchases of land, buildings and equipment	(18,731		)	(19,243		)
Sales of land, buildings and equipment	723			2,338
Net cash used in investing activities	(185,444		)	(186,779		)
FINANCING ACTIVITIES:
Net increase (decrease) in non-interest bearing, savings, interest checking and money market deposits	(569,342		)	554,167
Net increase (decrease) in time open and C.D.'s	81,449			(479,383		)
Net increase in short-term federal funds purchased and securities sold under
agreements to repurchase	726,843			1,868
Repayment of long-term borrowings	(50,961		)	(8,073		)
Purchases of treasury stock	(69,195		)	(75,536		)
Issuance of stock under stock purchase and equity compensation plans	8,154			9,766
Net tax benefit related to equity compensation plans	454			1,233
Cash dividends paid on common stock	(61,536		)	(60,819		)
Net cash provided by (used in) financing activities	65,866			(56,777		)
Increase in cash and cash equivalents	169,199			51,810
Cash and cash equivalents at beginning of year	779,825			517,551
Cash and cash equivalents at September 30	$	949,024		$	569,361
(A) Available for sale and non-marketable securities
Income tax payments, net	$	84,331		$	104,175
Interest paid on deposits and borrowings	$	24,956		$	30,198
Loans transferred to foreclosed real estate	$	6,744		$	7,178
Loans transferred from held for sale to held for investment category	$	8,941		$	—

See accompanying notes to consolidated financial statements.

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Commerce Bancshares, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013 (Unaudited)

1. Principles of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Commerce Bancshares, Inc. and all majority-owned subsidiaries (the Company). Most of the Company's operations are conducted by its subsidiary bank, Commerce Bank (the Bank). The consolidated financial statements in this report have not been audited. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to 2012 data to conform to current year presentation. In the opinion of management, all adjustments necessary to present fairly the financial position and the results of operations for the interim periods have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of results to be attained for the full year or any other interim periods.

The significant accounting policies followed in the preparation of the quarterly financial statements are disclosed in the 2012 Annual Report on Form 10-K.

2. Acquisition

On September 1, 2013, the Company acquired Summit Bancshares Inc. (Summit). Summit's results of operations are included in the Company's consolidated financial results beginning on that date. The transaction was accounted for using the acquisition method of accounting and, as such, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair value on the acquisition date. In this transaction, the Company acquired all of the outstanding stock of Summit in exchange for shares of Company stock valued at $43.2 million. The valuation of Company stock was determined on the basis of the closing market price of the Company's common shares on August 30, 2013. The Company's acquisition of Summit added $261.6 million in assets (including $207.4 million in loans), $232.3 million in deposits and two branch locations in Tulsa and Oklahoma City, Oklahoma. Intangible assets recognized as a result of the transaction consisted of approximately $13.1 million in goodwill and $4.9 million in core deposit premium. Most of the goodwill was assigned to the Company's Commercial segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

The fair value of core deposit premium was estimated by a third party using an after-tax cost savings method. This methodology calculates the present value of the estimated after-tax cost savings attributable to the core deposit base, relative to alternative costs of funds and tax benefit, if applicable, over the expected remaining economic life of the depositors. Based on an estimation of the expected remaining economic life of the depositors, the core deposit premium is being amortized over a 14 year period, using an accelerated method.

Historical pro forma information for the acquisition has not been presented because the effect on the Company's financial statements was not material. Acquired loans with evidence of deterioration in credit quality were not material to the consolidated financial statements of the Company. Accordingly, the provisions of ASC 310-30, which require special accounting for such loans, were not applied.

On September 3, 2013, the Company granted nonvested restricted stock awards of 42,674 shares of Company stock to various former Summit officers, which are included in the activity shown in Note 13. These awards vest over periods of 3 to 4 years and, assuming no awards are forfeited, compensation expense of approximately $1.8 million is expected to be recognized over the vesting period.

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3. Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2013 and December 31, 2012 are as follows:



(In thousands)	September 30, 2013		December 31, 2012
Commercial:
Business	$	3,634,461	$	3,134,801
Real estate – construction and land	363,194		355,996
Real estate – business	2,357,894		2,214,975
Personal Banking:
Real estate – personal	1,766,609		1,584,859
Consumer	1,489,066		1,289,650
Revolving home equity	421,569		437,567
Consumer credit card	787,215		804,245
Overdrafts	3,646		9,291
Total loans	$	10,823,654	$	9,831,384

At September 30, 2013, loans of $3.5 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2013 and 2012, respectively, follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	98,599		$	67,433	$	166,032	$	105,725		$	66,807	$	172,532
Provision	(2,885		)	7,031		4,146		(10,275		)	25,085		14,810
Deductions:
Loans charged off	913			12,174		13,087		3,879			36,405		40,284
Less recoveries on loans	3,144			3,297		6,441		6,374			10,100		16,474
Net loan charge-offs (recoveries)	(2,231		)	8,877		6,646		(2,495		)	26,305		23,810
Balance September 30, 2013	$	97,945		$	65,587	$	163,532	$	97,945		$	65,587	$	163,532
Balance at beginning of period	$	114,671		$	63,862	$	178,533	$	122,497		$	62,035	$	184,532
Provision	(2,479		)	8,060		5,581		(10,125		)	29,086		18,961
Deductions:
Loans charged off	1,795			12,480		14,275		7,502			39,710		47,212
Less recoveries on loans	1,720			3,473		5,193		7,247			11,504		18,751
Net loan charge-offs	75			9,007		9,082		255			28,206		28,461
Balance September 30, 2012	$	112,117		$	62,915	$	175,032	$	112,117		$	62,915	$	175,032

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The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2013 and December 31, 2012, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.



	Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
September 30, 2013
Commercial	$	7,689	$	73,698	$	90,256	$	6,281,851
Personal Banking	2,607		30,183		62,980		4,437,922
Total	$	10,296	$	103,881	$	153,236	$	10,719,773
December 31, 2012
Commercial	$	5,434	$	80,807	$	100,291	$	5,624,965
Personal Banking	2,051		36,111		64,756		4,089,501
Total	$	7,485	$	116,918	$	165,047	$	9,714,466

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2013 and December 31, 2012. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.



(In thousands)	Sept. 30, 2013		Dec. 31, 2012
Non-accrual loans	$	37,846	$	51,410
Restructured loans (accruing)	66,035		65,508
Total impaired loans	$	103,881	$	116,918

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The following table provides additional information about impaired loans held by the Company at September 30, 2013 and December 31, 2012, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
September 30, 2013
With no related allowance recorded:
Business	$	8,444	$	9,485	$	—
Real estate – construction and land	7,056		14,276		—
Real estate – business	6,048		9,038		—
	$	21,548	$	32,799	$	—
With an allowance recorded:
Business	$	18,026	$	20,549	$	2,740
Real estate – construction and land	22,970		24,934		2,687
Real estate – business	11,154		16,710		2,262
Real estate – personal	12,770		15,641		1,552
Consumer	4,647		4,647		134
Revolving home equity	643		643		2
Consumer credit card	12,123		12,123		919
	$	82,333	$	95,247	$	10,296
Total	$	103,881	$	128,046	$	10,296
December 31, 2012
With no related allowance recorded:
Business	$	9,964	$	12,697	$	—
Real estate – construction and land	8,440		15,102		—
Real estate – business	5,484		8,200		—
Real estate – personal	1,166		1,380		—
Revolving home equity	510		843		—
	$	25,564	$	38,222	$	—
With an allowance recorded:
Business	$	19,358	$	22,513	$	1,888
Real estate – construction and land	20,446		25,808		1,762
Real estate – business	17,115		23,888		1,784
Real estate – personal	14,157		17,304		857
Consumer	4,779		4,779		93
Revolving home equity	779		779		18
Consumer credit card	14,720		14,720		1,083
	$	91,354	$	109,791	$	7,485
Total	$	116,918	$	148,013	$	7,485

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Total average impaired loans for the three and nine month periods ended September 30, 2013 and 2012, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2013
Non-accrual loans	$	32,570	$	4,866	$	37,436
Restructured loans (accruing)	40,881		25,163		66,044
Total	$	73,451	$	30,029	$	103,480
For the nine months ended September 30, 2013
Non-accrual loans	$	36,656	$	5,287	$	41,943
Restructured loans (accruing)	40,200		25,857		66,057
Total	$	76,856	$	31,144	$	108,000
For the three months ended September 30, 2012
Non-accrual loans	$	51,337	$	7,621	$	58,958
Restructured loans (accruing)	41,885		19,750		61,635
Total	$	93,222	$	27,371	$	120,593
For the nine months ended September 30, 2012
Non-accrual loans	$	59,159	$	7,399	$	66,558
Restructured loans (accruing)	44,063		21,204		65,267
Total	$	103,222	$	28,603	$	131,825

The table below shows interest income recognized during the three and nine month periods ended September 30, 2013 and 2012 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.



	For the Three Months Ended September 30				For the Nine Months Ended September 30
(In thousands)	2013		2012		2013		2012
Interest income recognized on impaired loans:
Business	$	124	$	248	$	372	$	745
Real estate – construction and land	218		210		653		630
Real estate – business	48		72		145		216
Real estate – personal	64		22		192		65
Consumer	87		16		261		47
Revolving home equity	9		1		26		2
Consumer credit card	262		328		785		983
Total	$	812	$	897	$	2,434	$	2,688

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Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 2013 and December 31, 2012.



(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
September 30, 2013
Commercial:
Business	$	3,616,498	$	5,837	$	596	$	11,530	$	3,634,461
Real estate – construction and land	342,953		11,126		83		9,032		363,194
Real estate – business	2,310,501		35,495		—		11,898		2,357,894
Personal Banking:
Real estate – personal	1,747,785		12,176		1,262		5,386		1,766,609
Consumer	1,473,403		14,008		1,655		—		1,489,066
Revolving home equity	419,333		1,576		660		—		421,569
Consumer credit card	769,906		10,050		7,259		—		787,215
Overdrafts	3,377		269		—		—		3,646
Total	$	10,683,756	$	90,537	$	11,515	$	37,846	$	10,823,654
December 31, 2012
Commercial:
Business	$	3,110,403	$	10,054	$	1,288	$	13,056	$	3,134,801
Real estate – construction and land	325,541		16,721		56		13,678		355,996
Real estate – business	2,194,395		3,276		—		17,304		2,214,975
Personal Banking:
Real estate – personal	1,564,281		10,862		2,854		6,862		1,584,859
Consumer	1,273,581		13,926		2,143		—		1,289,650
Revolving home equity	433,437		2,121		1,499		510		437,567
Consumer credit card	786,081		10,657		7,507		—		804,245
Overdrafts	8,925		366		—		—		9,291
Total	$	9,696,644	$	67,983	$	15,347	$	51,410	$	9,831,384

Credit quality

The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.

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Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2013
Pass	$	3,534,162	$	323,142	$	2,239,654	$	6,096,958
Special mention	63,931		1,636		52,241		117,808
Substandard	24,838		29,384		54,101		108,323
Non-accrual	11,530		9,032		11,898		32,460
Total	$	3,634,461	$	363,194	$	2,357,894	$	6,355,549
December 31, 2012
Pass	$	3,018,062	$	297,156	$	2,103,913	$	5,419,131
Special mention	58,793		11,400		38,396		108,589
Substandard	44,890		33,762		55,362		134,014
Non-accrual	13,056		13,678		17,304		44,038
Total	$	3,134,801	$	355,996	$	2,214,975	$	5,705,772

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At September 30, 2013, these were comprised of $228.3 million in personal real estate loans and $60.4 million in consumer loans, or 6.5% of the Personal Banking portfolio. At December 31, 2012, these were comprised of $224.5 million in personal real estate loans and $87.4 million in consumer loans, or 7.6% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2013 and December 31, 2012 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2013
FICO score:
Under 600	1.8	%	5.5	%	2.0	%	4.0	%
600 - 659	3.2		10.5		8.2		11.8
660 - 719	9.7		24.5		15.4		33.6
720 - 779	26.6		28.2		29.5		28.2
780 and Over	58.7		31.3		44.9		22.4
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2012
FICO score:
Under 600	2.3	%	6.7	%	2.6	%	4.4	%
600 - 659	3.2		11.3		5.3		11.7
660 - 719	10.4		24.4		15.2		32.1
720 - 779	26.6		26.4		30.0		28.2
780 and Over	57.5		31.2		46.9		23.6
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $89.1 million at September 30, 2013. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $23.1 million at September 30, 2013. Other performing restructured loans totaled $66.0 million at September 30, 2013. These are primarily comprised of certain business, construction and business real estate loans classified as

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substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $44.7 million at September 30, 2013. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $12.1 million at September 30, 2013. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At September 30, 2013, these loans totaled $9.2 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at September 30, 2013, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.



(In thousands)	September 30, 2013		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	23,167	$	7,969
Real estate - construction and land	28,631		3,507
Real estate - business	10,614		3,129
Personal Banking:
Real estate - personal	9,306		—
Consumer	2,058		—
Revolving home equity	3,232		—
Consumer credit card	12,123		710
Total restructured loans	$	89,131	$	15,315

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.4 million on an annual, pre-tax basis, compared to amounts contractually owed.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of $12.8 million at September 30, 2013 to lend additional funds to borrowers with restructured loans.

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The Company’s holdings of foreclosed real estate totaled $7.0 million and $13.5 million at September 30, 2013 and December 31, 2012, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $3.5 million at September 30, 2013 and December 31, 2012, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.

4. Investment Securities

Investment securities, at fair value, consisted of the following at September 30, 2013 and December 31, 2012.



(In thousands)	Sept. 30, 2013		Dec. 31, 2012
Available for sale	$	8,577,282	$	9,522,248
Trading	18,295		28,837
Non-marketable	114,520		118,650
Total investment securities	$	8,710,097	$	9,669,735

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for debt and regulatory purposes, which totaled $45.2 million at September 30, 2013 and $45.4 million at December 31, 2012. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. Non-marketable securities also include private equity investments, which amounted to $69.2 million at September 30, 2013 and $73.2 million at December 31, 2012.

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A summary of the available for sale investment securities by maturity groupings as of September 30, 2013 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
After 1 but within 5 years	$	275,088	$	295,587
After 5 but within 10 years	54,421		57,489
After 10 years	72,895		62,429
Total U.S. government and federal agency obligations	402,404		415,505
Government-sponsored enterprise obligations:
Within 1 year	25,115		25,286
After 1 but within 5 years	99,119		101,383
After 5 but within 10 years	169,727		160,947
After 10 years	146,976		137,346
Total government-sponsored enterprise obligations	440,937		424,962
State and municipal obligations:
Within 1 year	133,539		134,734
After 1 but within 5 years	700,750		721,051
After 5 but within 10 years	535,416		524,339
After 10 years	239,264		223,187
Total state and municipal obligations	1,608,969		1,603,311
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,755,358		2,810,261
Non-agency mortgage-backed securities	210,917		222,081
Asset-backed securities	2,893,173		2,890,646
Total mortgage and asset-backed securities	5,859,448		5,922,988
Other debt securities:
Within 1 year	30,103		30,451
After 1 but within 5 years	46,473		46,796
After 5 but within 10 years	90,036		84,559
Total other debt securities	166,612		161,806
Equity securities	15,423		48,710
Total available for sale investment securities	$	8,493,793	$	8,577,282

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities (TIPS), which totaled $415.4 million, at fair value, at September 30, 2013. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $125.0 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Included in equity securities is common stock held by the holding company, Commerce Bancshares, Inc. (the Parent), with a fair value of $36.5 million at September 30, 2013.

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For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2013
U.S. government and federal agency obligations	$	402,404	$	23,567	$	(10,466	)	$	415,505
Government-sponsored enterprise obligations	440,937		2,458		(18,433		)	424,962
State and municipal obligations	1,608,969		29,756		(35,414		)	1,603,311
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,755,358		74,070		(19,167		)	2,810,261
Non-agency mortgage-backed securities	210,917		12,570		(1,406		)	222,081
Asset-backed securities	2,893,173		7,603		(10,130		)	2,890,646
Total mortgage and asset-backed securities	5,859,448		94,243		(30,703		)	5,922,988
Other debt securities	166,612		971		(5,777		)	161,806
Equity securities	15,423		33,287		—			48,710
Total	$	8,493,793	$	184,282	$	(100,793	)	$	8,577,282
December 31, 2012
U.S. government and federal agency obligations	$	399,971	$	40,395	$	(1,607	)	$	438,759
Government-sponsored enterprise obligations	467,063		5,188		(677		)	471,574
State and municipal obligations	1,585,926		46,076		(16,295		)	1,615,707
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,248,007		132,953		(5		)	3,380,955
Non-agency mortgage-backed securities	224,223		12,906		(118		)	237,011
Asset-backed securities	3,152,913		15,848		(1,367		)	3,167,394
Total mortgage and asset-backed securities	6,625,143		161,707		(1,490		)	6,785,360
Other debt securities	174,727		3,127		(102		)	177,752
Equity securities	5,695		27,401		—			33,096
Total	$	9,258,525	$	283,894	$	(20,171	)	$	9,522,248

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3/A-, whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2013, the fair value of securities on this watch list was $202.9 million compared to $220.7 million at December 31, 2012.

As of September 30, 2013, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $77.4 million. The cumulative credit-related portion of the impairment initially recorded on these securities totaled $12.8 million and was recorded in earnings. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at September 30, 2013 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	13%	-	55%
Credit support	0%	-	15%
Loss severity	17%	-	81%

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The following table shows changes in the credit losses recorded in earnings during the nine months ended September 30, 2013 and 2012, for which a portion of an OTTI was recognized in other comprehensive income.



	For the Nine Months Ended September 30
(In thousands)	2013			2012
Balance at January 1	$	11,306		$	9,931
Credit losses on debt securities for which impairment was previously recognized	1,260			1,227
Increase in expected cash flows that are recognized over remaining life of security	(59		)	(93		)
Balance at September 30	$	12,507		$	11,065

Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2013
U.S. government and federal agency obligations	$	62,429	$	10,466	$	—	$	—	$	62,429	$	10,466
Government-sponsored enterprise obligations	308,029		18,433		—		—		308,029		18,433
State and municipal obligations	560,695		20,370		79,486		15,044		640,181		35,414
Mortgage and asset-backed securities:
Agency mortgage-backed securities	638,282		19,167		—		—		638,282		19,167
Non-agency mortgage-backed securities	53,871		1,387		1,629		19		55,500		1,406
Asset-backed securities	1,299,698		8,865		70,515		1,265		1,370,213		10,130
Total mortgage and asset-backed securities	1,991,851		29,419		72,144		1,284		2,063,995		30,703
Other debt securities	97,093		5,541		2,744		236		99,837		5,777
Total	$	3,020,097	$	84,229	$	154,374	$	16,564	$	3,174,471	$	100,793
December 31, 2012
U.S. government and federal agency obligations	$	71,464	$	1,607	$	—	$	—	$	71,464	$	1,607
Government-sponsored enterprise obligations	102,082		677		—		—		102,082		677
State and municipal obligations	173,600		2,107		80,530		14,188		254,130		16,295
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,874		5		—		—		5,874		5
Non-agency mortgage-backed securities	—		—		12,609		118		12,609		118
Asset-backed securities	338,007		976		78,684		391		416,691		1,367
Total mortgage and asset-backed securities	343,881		981		91,293		509		435,174		1,490
Other debt securities	39,032		102		—		—		39,032		102
Total	$	730,059	$	5,474	$	171,823	$	14,697	$	901,882	$	20,171

The total available for sale portfolio consisted of approximately 1,700 individual securities at September 30, 2013. The portfolio included 490 securities, having an aggregate fair value of $3.2 billion, that were in an unrealized loss position at September 30, 2013, compared to 144 securities, with a fair value of $901.9 million, at December 31, 2012. The total amount of unrealized loss on these securities increased $80.6 million to $100.8 million at September 30, 2013, which was mainly due to higher interest rates in the second and third quarters of 2013. At September 30, 2013, the fair value of securities in an unrealized loss position for 12 months or longer with temporary impairment totaled $152.7 million, or 1.8% of the total portfolio value, and the fair value of other securities with other-than-temporary impairment totaled $1.6 million.

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The Company’s holdings of state and municipal obligations included gross unrealized losses of $35.4 million at September 30, 2013. Of these losses, $15.0 million related to auction rate securities and $20.4 million related to other state and municipal obligations. This portfolio, exclusive of ARS, totaled $1.5 billion at fair value, or 17.2% of total available for sale securities. The average credit quality of the portfolio, excluding ARS, is Aa2 as rated by Moody’s. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below. The Company does not have exposure to obligations of municipalities which have filed for Chapter 9 bankruptcy. The Company has processes and procedures in place to monitor its holdings, identify signs of financial distress and, if necessary, exit its positions in a timely manner.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At September 30, 2013
Texas	10.2	%	5.0	Aa1
Florida	9.5		4.6	Aa2
Ohio	5.7		5.0	Aa2
Washington	5.5		5.1	Aa2
New York	5.1